QE3 Still on Table, but It May Not Offset Drags

In his speech Friday at Jackson Hole, Federal Reserve Chairman Ben Bernanke made it clear that the Fed stands ready to help the economy with further quantitative easing. But he also acknowledged the headwinds now facing the economy — challenges that may be immune to QE3′s tonic.

In his speech, Bernanke evaluated the last two QEs. He said Fed research shows the first two rounds may have raised the level of output by almost 3% and increased private payrolls by more than 2 million jobs.

But when discussing economic prospects, he mentioned three drags on the economy. First, housing — the epicenter of the Great Recession — is not contributing to growth as it did in past upturns. The Fed has helped by lowering mortgage rates, but the ills of housing go beyond the price of credit.

Second, spending cuts at all levels of government have hurt business activity. Plus, uncertainty about the fiscal cliff and lifting the federal debt ceiling “are probably also restraining activity,” Bernanke said.